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Title: The ECB's Two Pillars

Author(s): Stefan Gerlach

Publication Date: January 2003

Keyword(s):

Programme Area(s): International Macroeconomics

Abstract: This Paper suggests a formal interpretation of the ECB?s two-pillar framework for monetary policy. I decompose inflation in the euro area into high- and low-frequency (or short-run and medium/long-run) components, which are correlated with monetary growth and the output gap, respectively. I proceed to propose and estimate a ?two-pillar? Phillips curve that assumes that money causes prices. While the model fits well and the causality assumption seems compatible with the 1980-90 data, there appears to be reverse causality from prices to money in the 1991-2001 period, which would invalidate my model.

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Bibliographic Reference

Gerlach, S. 2003. 'The ECB's Two Pillars'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3689